Yahoo Finance Are Steamships Trading Company Limited’s (ASX:SST) Returns On Investment Worth Your While?
Today we are going to look at Steamships Trading Company Limited (ASX:SST) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
So, How Do We Calculate ROCE?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Steamships Trading:
0.055 = K71m ÷ (K1.5b - K148m) (Based on the trailing twelve months to December 2019.)
So, Steamships Trading has an ROCE of 5.5%.
See our latest analysis for Steamships Trading
Does Steamships Trading Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Steamships Trading's ROCE appears to be around the 6.5% average of the Industrials industry. Aside from the industry comparison, Steamships Trading's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
We can see that, Steamships Trading currently has an ROCE of 5.5%, less than the 9.5% it reported 3 years ago. This makes us wonder if the business is facing new challenges. You can see in the image below how Steamships Trading's ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. You can check if Steamships Trading has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Do Steamships Trading's Current Liabilities Skew Its ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.
Steamships Trading has current liabilities of K148m and total assets of K1.5b. Therefore its current liabilities are equivalent to approximately 10% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.
Our Take On Steamships Trading's ROCE
If Steamships Trading continues to earn an uninspiring ROCE, there may be better places to invest. Of course, you might also be able to find a better stock than Steamships Trading. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
